Stop being afraid of fraud

By Stavros Stavrinoudakis, Professional Services and Presales Manager, SAS

Saving the global financial system from collapse is an admiral reason to develop regulations, but that shouldn’t be your only motivation. You have as much to gain from complying with them. The technology and processes you establish and implement to meet the data quality requirements for Solvency II is the first step to building a robust anti-fraud framework.

In the past, many insurers paid lip service to fighting fraud. Their limited mechanisms to fight fraud, the increasingly complex fraud schemes and the innovativeness of fraudsters’ overwhelmed those insurers’ efforts and so they simply wrote fraud off as a cost of doing business.

But that cost keeps escalating and it’s no longer a cost they – or you – can afford. For instance, just writing fraud off can hurt your reputation. Insurers need to keep the balance between assumption and prosecution of fraudulent cases. That balance can be the difference between attracting new customers and scaring them away. And, if you don’t have a strategy to diligently and effectively root out fraud (meaning you just accept a percentage as a business cost), it probably means that you don’t know your true exposure, which can mean higher capital requirements – capital you could be using to grow your business.

By analyzing fraud you can get real value, measured instantly in your ROI and profit and loss.

Analyze fraud and gain a competitive advantage

What does the future look like? The Association of British Insurers reports insurance fraud at record high and a 9 percent decrease in the cost of comprehensive car insurance for 2013. A possible result? More insurance claims losses and less revenue. And without a sound anti-fraud framework your profits will be minimized. With a sound anti-fraud framework, you’ll be able to reduce your exposure and minimize fraud losses, meet regulatory requirements, protect your firm’s reputation and sell at competitive prices.

Where can information on fraud be used throughout the organization?

Ideally, information about a suspicious (potentially or proven fraudulent) claim would be used to deny or withhold settlement of that claim and – depending on clear evidence – to press charges against the fraudulent party. But this is not the only way to use that information. Here are five examples of other functional areas that could benefit from the information:

In the claims settlement process, predict the fraud likelihood of an applicant or a third party, such as an appraiser, a repair shop or a medical provider. After all, what’s the point of writing insurance to an individual who might have a proven track record on fraud, even if it’s in a different line of business?

Database marketing could use this information as an additional predictor for cross- or up-sell potential for a given customer – or to predict the likelihood of cancellation.

Using link analysis you can look for connections between a new applicant and a known fraudster, and then incorporate that information as predictors for a scoring model.

Those in charge of negotiating contracts with claims settlement partners could use the score, for example, to track records of individual members (say of a preferred provider network of automotive repair shops). The information could help them determine if those partners should be excluded or if they should adjust the terms and conditions of the contract to offset the risk.

The aggregated figure of known fraud cases or suspicion scores could be used as an additional covariate in the underlying ratemaking models developed by the actuarial sciences department. This may adjust the influence of other risk factors on dimensions such as claim frequencies, claim amount or pure premium, and might give new insights into the profitability of developing a new product.

Fight fraud across all business lines

Deliberate fraudsters and organized criminal gangs know how to communicate and seamlessly interact with your various business lines. They know all aspects of regulation, customer rights and your internal and external business processes. To get the maximum outcome from the insurer, fraudsters disguise themselves as policy holders, beneficiaries, claimants and witnesses. They may also work in conspiracy with suppliers, surveyors, investigators, brokers or even insiders.

Next steps? Make your move. Fraud is out there, it surrounds insurers and in many cases has already stepped in. But fraud is not to be feared. By analyzing fraud you can get real value, measured instantly in your ROI and profit and loss.